National Westminster Bank Plc v Rabobank Nederland

This is the hearing of the claimant's application for specific disclosure of documents.

The original application was in broader terms than I have to deal with. The issues between the parties are now confined to two categories of documents: what are known as the YFG report and documents arising in associated investigations, and two documents which were disclosed by the defendant "in error". These are the documents bundle 1/200-201. As a matter of formality there are two applications before the court. The first was issued by the claimant NWB, on 5th July, and the second by the defendant, Rabobank on the 7th August.

NWB's application seeks disclosure of specific documents, Rabobank seeks recovery of documents which it contends are privileged but which it disclosed in error. For reasons which I will come to later, similar issues arise on both applications.

The matter is urgent since the trial of the action is due to take place in slightly over two weeks before Mr Justice Colman. Although NWB is nominally the claimant, the present proceedings are principally concerned with the counterclaim brought by Rabobank in which it makes, amongst other things, allegations of fraudulent misrepresentation and breach of fiduciary duty against NWB.

The allegations are made in the following context. NWB and Rabobank, through its London branch, Rabobank London, were both syndicated lenders to a group called Yorkshire Food Group ("YFG") which, although based in the UK had significant operations in the United States, under a credit facility agreement dated 21st March 1996.

In the course of 1996 YFG ran into difficulties; and the lending was placed by both NWB and Rabobank London into "work out".

By September 1997 it had been decided by NWB and Rabobank London that it would be necessary for YFG to be placed into some form of insolvency procedure. However, Rabobank's New York branch came up with a proposal to purchase NWB's lending at a discount so that it could pursue its own re-financing plans in relation to YFG.

This proposal was put into effect in October 1997 by way of a deed of transfer pursuant to which a subsidiary of Rabobank acquired NWB's lending. Rabobank's re-financing plans failed and in December 1997 receivers were appointed over YFG.

At the core of its case against NWB is the allegation that NWB failed to disclose information which, if it had been disclosed, would have meant that Rabobank would not have advanced sums during the "work out" period, and would not have agreed to purchase NWB's lending. NWB denies these allegations, its case at trial will be that Rabobank is simply trying to recover the consequences of its own failures in entering into the take-out on the basis on which it did.

NWB's suspicion is that Rabobank has claimed privilege over documents which may contain evidence of various mistakes which Rabobank itself considered it made in entering into the take-out.

In December 1997 Rabobank embarked on an investigation into what had occurred. This investigation and a subsequent report have been referred to as the YFG investigation and report; and the origin and purpose of this report has been the focus of a considerable amount of evidence, analysis and submission.

Rabobank, I should say, do not accept the allegations that NWB advance or accept that their suspicions are justified.

Mr Phillip QC for NWB, submitted in summary as follows.

Mr Marshall QC, for Rabobank submitted in answer:

Apart from one issue there was little significant difference as to the law which applies; and I can state the general principles shortly.

There are two distinct aspects of legal privilege. (a) Legal Advice privilege which attaches to all communications made in confidence between a lawyer and client for the purpose of giving and obtaining legal advice; and (b) Litigation Privilege which relates to communications at a stage when legal proceedings are pending or contemplated.

There are common features of both types of Privilege; (a) both can arise in connection with an in-house lawyer, (b) both arise irrespective of whether the relevant lawyer was English or a foreign lawyer, (c) where a document contains privileged and unprivileged materials which are severable, the client is entitled to rely on privilege in relation to the privileged material. If they are not severable and the document is created for the purpose of obtaining or giving legal advice or for the dominant purpose of gathering evidence, then it is permissible to claim privilege of the entire document.

Legal Advice privilege applies to communications between a client and a lawyer made in confidence for the purpose of giving or obtaining legal advice or assistance, see Three Rivers District Council v the Governor and Company of the Bank of England (No 6) [2005] 1 AC 610, Lord Rodger of Earlsferry at 654D to E.

As I have already indicated, there is an issue between the parties as to the extent of this privilege. For Rabobank, Mr Marshall submitted that the privilege extended beyond communications between client and lawyer, provided the documentation:

In relation to documents 1/200-201, he submitted that Mr Duit was the agent of the lawyer and that, as such, Legal Advice privilege attaches to these documents.

For NWB, Mr Phillips submitted that the privilege does not apply to this sort of preparatory work which does not constitute communications between lawyer and client; and that the decision of the Court of Appeal inThree Rivers (No 5) puts the matter beyond all argument.

In my judgment Mr Phillips's submission is correct. InThree Rivers (No 5) the applicant's sought the disclosure of documents which had been created by the Bank of England's internal employees in connection with the Bank's presentation of its case to the inquiry chaired by Lord Justice Bingham into the collapse of BCCI.

In the context of this inquiry the Bank had established an internal unit comprising of non-lawyers, referred to as the Bingham Inquiry Unit or BIU, to deal with the Bank's response to the inquiry. In addition, the Bank retained its usual solicitors, Freshfields, to advise.

The Bank's employees created various documents which were passed to the BIU for the purpose of enabling the Bank's lawyers to advise the Bank on how to present its case to the inquiry.

The applicant sought disclosure of these documents over which the Bank had claimed Legal Advice privilege.

The Court of Appeal held that Legal Advice privilege could only be claimed for documents passing between the client and the legal advisers, and that Legal Advice privilege did not attach to "preparatory" materials even if created for the purpose of enabling lawyers to advise, unless there was such communications.

The Court of Appeal stated that, at page 1575H:

Accordingly, since the document in question did not represent communications between lawyer and client, they were not subject to Legal Advice privilege.

Although the decision inThree Rivers (No 5) has been criticised there can be little doubt that it represents the present state of the law. The petition for leave to appeal by the Bank of England was refused by the Appeal Committee of the House of Lords; and inThree Rivers (No 6) the House of Lords declined an invitation to express its views on the correctness ofThree Rivers (No 5), despite hearing argument on the point from many interested parties.

Lord Scott expressly stated that:

That was undoubtedly correct; but even without such a statement from such a source, I would have been bound by a decision of the Court of Appeal. In my view, documents 1/200-201, where communication was via the audit department of Rabobank, cannot be subject to Legal Advice privilege.

Since I have concluded that Legal Advice privilege cannot be claimed for documents other than those passing between the client and its legal advisers, it follows that documents which fall outside that category, such as these documents should be disclosed unless a claim for Litigation Privilege can be made out.

Before dealing with this point I should state my conclusions on Mr Phillips's submissions on the facts which he contended should lead me, in the exercise of my discretion, to inspect the YFG report and associated documents.

(1) In my view Mr Phillips makes good his submission that Rabobank's current evidence about the dominant purpose of the YFG investigation and report is difficult to reconcile with both its documents created at the time and some of Rabobank's other evidence.

The relevant documents are memoranda dated 4^th December 1997 (1/78), 10th December (1/80) and 19^th December (2/405).

Nor is the current evidence easy to reconcile with a subsequent memorandum of the 19th May 1998 (2/299). Simply by way of example.

The internal audit memorandum dated 10th December 1997 is from Mr Duit of the audit department, to Mr Mesritz, general manager of Rabobank New York in the following terms:

Mr Mesritz's evidence in depositions was that at the end of the 1997:

The evidence given by other Rabobank witnesses in US discovery proceedings is also difficult to reconcile with Rabobank's current position.

(2) Against this there is the evidence of Rabobank's witnesses on this application. Mr Duit was the head of the Credit Audit Group. He assumed that the investigation ordered in the 10th December memorandum would be the usual audit department investigation. However, according to his witness statement this was not so. In paragraph 14 of his witness statement he says:

The "specific legal purpose" is described in paragraph 13 of this witness statement:

Mr Schijf was Rabobank's general counsel at the time. In the earlier of two witness statements he has made in these proceedings, at paragraph 9, he said this:

Other witnesses have endorsed this evidence, as well as the evidence of Mr Duit, about the purpose of the investigation.

In paragraph 7 of his second witness statement, dated 25th August, Mr Schijf was more specific:

I note that this statement was made at a late stage.

(3) Mr Phillips has also made some persuasive points in his analysis of Rabobank's evidence, including that of the US lawyers Mr Fisher and Mr Rogers. As he points out, since Rabobank had instructed their firm, Brobeck and the forensic accountants Kroll to conduct an investigation into potential litigation, it is unclear why it should set up its own contemporaneous internal investigation with precisely the same dominant purpose.

It may be that Rabobank were considering discrete claims beyond those envisaged by the YFG investigation. That is a point which will doubtless be pursued at trial, when I am told that some of those who have given witness statements on this application will give evidence. However, although I am doubtful about some of the evidence advanced by Rabobank, Mr Phillips has not persuaded me that its evidence on this application, taken as a whole, can be dismissed as untruthful.

(4) It is clear that Rabobank have made mistakes and have adopted inconsistent approaches to claiming privilege over relevant documents. The proposition is fully supported by a 22-paragraph further skeleton argument submitted by NWB this morning. It is unnecessary to elaborate further on this point since Mr Marshall accepted, on instructions, that there had been "mistakes and inconsistencies of approach in giving disclosure". Nevertheless, this conclusion undermines the confidence which the court might otherwise have in Rabobank's disclosure process.

In the light of these views it seems to me that if there is a threshold which has to be crossed before a court should properly be invited to look at specific documents, NWB has crossed it.

Their complaints cannot be dismissed simply with the answer: "we are doing the best we can in a difficult situation" or "our explanations are sufficient".

In these circumstances it is clear that the court has a discretion to look at documents in respect of which privilege is claimed. The power existed under the rules of the Supreme Court and was exercised, see, for example, The Sagheera (1997) 1 L1 Rep 160. The power is now specifically set out in CPR Rule 31.19; and the use of such powers in an appropriate case is implicit from paragraph 35 of the judgment of the Court of Appeal inThree Rivers (No 5).

A statement as to the dominant purpose, even if sworn, cannot be dispositive of the issue; see also Thanki, at paragraph 4.99.

The question then, is whether the court should exercise its discretion to look at the documents in the particular case? In Bank Austria v Pricewaterhouse(unrep) 16th April 1997, Neuberger J considered the issues which may arise when the court is asked to look at documents in this type of situation. In that case it was accepted that the court could (1) require the disclosing party to make good its claim for privilege by an appropriate affidavit, or (2) look at the documents and form a view, or (3) simply order disclosure on the basis that the disclosing party had every opportunity to claim privilege properly and had failed to do so.

Neuberger J rejected the third course but also expressed doubts about the second course. His concern was about looking at the documents out of context. It was this that persuaded him that looking at the documents should be a solution of last resort.

I agree.

In the present case the question of context is particularly relevant. The trial takes place in just over two-weeks time. It is due to last three months. The number of documents may be imagined.

The quantity of documents in issue on this application does not need to be imagined. Mr Marshall says that the YFG report runs to 55 pages and that the investigation documents run to two lever arch files. The possibility of properly digesting such an amount of material in its proper context in the time available for this application is remote. I recognise an inherent problem in this: namely, that the person who is likely to know most about the case is the trial judge who cannot be asked to carry out the inspection for obvious reasons. However, it seems to me that where the court is being asked to look at a large number of documents as in this case, proper consideration has to be given by the applicant of a suitable timetable in which that may be done.

But the problem does not end there. Mr Marshall submits that if I were to look at the documents, he would wish to make detailed submissions about them in the absence of NWB. This seems to me to be another objection to inspecting the documents. Submissions in the absence of one party should in my judgment be a rare and exceptional course. Even in "without notice" applications a record is kept and made available to the respondent so that it may know what was said in private to the Judge.

As the learned editor of Hollander on Documentary Evidence, Ninth Edition, puts it at page 182:

While not wishing to set out an exclusive list, in my view the court should not inspect documents unless there is credible evidence that the lawyers have either misunderstood their duty or are not to be trusted, and where there is no reasonably practical alternative. In the present case, as I have said, Mr Marshall has said that he has looked at the documents and that, in his view, the claim for privilege is properly made out. This view is shared by his instructing solicitor.

Mr Phillips quite properly drew back from making an allegation of bad faith; and focused on his argument that Rabobank's lawyers have misunderstood the law, at least in relation to Legal Advice privilege.

I have accepted his submission on that point in relation to Legal Advice privilege.

In the light of the foregoing in my judgment the appropriate course is to adopt the first course considered by Neuberger J in the Bank Austria case and to require Rabobank's solicitors to make an affidavit verifying the claims for privilege in the present case, in relation to all documents currently withheld.

I will hear the parties on the timing and the subjects to be covered this. This order may not be the end of the matter. There may be developments in the trial which cast a new light on the applications and which may bring into play the continuing obligation to disclose relevant documents; and further information may show a more compelling case for disclosure.

I will also make a declaration that the documents at bundle 1/200-201 are not subject to Legal Advice privilege. Again I will hear the parties as to the form of the declaration.