England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE COMMERCIAL COURT
(MR JUSTICE COOKE)

		Royal Courts of Justice Strand, London, WC2A 2LL
		4th September 2009

Lord Justice Etherton:

1. This is an appeal from the order of Cooke J on 30 April 2009 dismissing the application of the claimants for specific disclosure. The issue is whether the defendants are entitled to claim litigation privilege in respect of the documents in question.

Factual background.

2. The claimants were the owners and operators of the vessel WD Fairway ("the Vessel"), and were the assureds under a marine insurance policy in respect of the Vessel. The defendants are insurers who subscribed to the Policy. The Vessel was insured under the Policy for a total of €145 million, of which €68.5 million of cover was in respect of "Hull and Machinery". The cover under the policy was in excess of €5 million provided under a primary policy.
3. On 8 March 2007 the Vessel was struck amidships by another ship. Notice of loss was given to the defendants on the same day.
4. The claimants appointed Van Woerkom, Nobles & Ten Veen BV ("WNV") to produce a survey report. On about 23 March 2007 WNV produced its report ("the WNV Report"), which estimated the cost of repairs as being in the region of €91 million. On 27 March 2007 the WNV Report was sent to the lead insurer, Royal and Sun Alliance, acting on behalf of the defendants.
5. Also on 27 March 2007, the claimants, through their brokers, gave Notice of Abandonment in respect of the Vessel to the defendants. That Notice was served on the basis that the Vessel was a constructive total loss ("CTL") since WNV's estimate of the cost of repairs exceeded €73.5 million, being the aggregate of the sum insured under the primary policy and the cover for the Hull and Machinery under the Policy.
6. On 27 March 2007 Stephenson Harwood were retained as solicitors for the defendants. On 28 March 2007 they instructed Noble Denton as surveyors to comment and advise on the WNV Report. Also on 28 March 2007 the defendants rejected the Notice of Abandonment. Noble Denton reported to Stephenson Harwood in early May  2007. The figures for the cost of repair produced by Noble Denton were substantially less than those in the WNV Report. Those figures were supplied on 15 May 2007 to the claimants.
7. On 1 February 2008 the claimants issued the Claim Form in these proceedings claiming a full indemnity, damages and interest. It was not immediately notified to or served on the defendants.
8. On 10 March 2008 the defendants accepted that the vessel was a CTL. They then paid the claimants what was outstanding under the Policy.

The procedural background

9. The Claim Form was served, together with Particulars of Claim, on 29 May 2008. The Particulars of Claim limit the claim to one for damages for breach of contract equal to compound interest from 28 March 2007, alternatively simple interest in the sum of €5,795,674.18 pursuant to section 35A of the Supreme Court Act 1981.
10. By their amalgamated Defence the defendants denied liability on various grounds, including that the defendants were entitled, by contract or custom or market practice, to a reasonable opportunity to investigate the casualty before being obliged to indemnify the claimants, and that reasonable opportunity did not expire prior to April 2008.
11. Following standard disclosure by all parties on 16 March 2009, the claimants issued an application on 1 April 2009 ("the Application") seeking an order for disclosure of several categories of documents. In particular, so far as relevant to this appeal, the claimants sought an order requiring the defendants to disclose and list in a schedule: (1) all the documents generated prior to 27 May 2008 in respect of which the defendants claimed litigation privilege; and (2) all relevant documents created by, and correspondence with, Noble Denton. The defendants' case is that those documents are protected from disclosure by litigation privilege.
12. The Application was, as I have said, dismissed by Cooke J on 30 April 2009 on the ground that the defendants are entitled to litigation privilege. It is against that refusal that this appeal is brought.
13. The trial has been fixed for 5 October 2009 and so the appeal has been expedited to be heard during the vacation.
14. The grounds of appeal fall into two parts. First, the claimants say that the requirements for litigation privilege are not satisfied on the evidence. Second and alternatively, they say that the defendants have impliedly waived any litigation privilege they would otherwise have had by alleging that a reasonable opportunity to investigate the loss did not expire prior to April 2008.

Litigation privilege

15. The legal requirements for claiming litigation privilege are well established and are not in dispute. Communications between a solicitor or the client and a third party will be protected by litigation privilege where the communications are for the dominant purpose of obtaining legal advice in connection with, or conducting, litigation reasonably in prospect: Re Highgate Traders Limited [1984] BCLC 151. A mere possibility of litigation is not enough, but, on the other hand, the chance of litigation need not be greater than 50 per cent: see United States of America v Philip Morris Inc [2004] EWCA Civ 330 at paragraph [68] (Brooke LJ).
16. Evidence in opposition to the Application, and in support of the defendants' claim to litigation privilege, was given in a witness statement by Mr Gavin Davis of Stephenson Harwood. Having referred to the production of the WNV Report and the claimants' Notice of Abandonment, he said:

"15. The Claimants expressly relied on the WNV Report to found their claim that the WD Fairway was a CTL. The Defendants' position in this respect is set out in paragraph D8 of the Amended Amalgamated Defence, viz. that this report was manifestly inadequate for that purpose because:

15.1 The WNV Report estimated the cost based upon "presently known information regarding the vessel's position and condition";

15.2 No tenders of repair had been obtained, as is the custom in the London marine insurance market;

15.3 No detailed investigation of the equipment or spares on WD Fairway had been carried out;

15.4 No dive or drydock survey had been carried out on the hull of the vessel; and

15.5 The WNV Survey contained insufficient detail as to how various repair estimates had been calculated.

This position was formed within days of receipt of the report. Messrs Noble Denton reported to my firm in early May 2007, by which stage, it became clear that, on their estimates, the vessel was unlikely to be a CTL."

17. Mr Davis then referred to the defendants declining the Notice of Abandonment on 28 March 2007, the instruction of Stephenson Harwood on the previous day and the instruction of Noble Denton by Stephenson Harwood on 28 March 2007. He continued as follows:

"17….I believe that the single wider purpose, or at least the dominant or dual purpose behind the generation of the Noble Denton documents following 28 March 2007, was that of collecting evidence for use in potential litigation and so as to enable the giving of legal advice in connection with that potential litigation. The Defendants were not seeking to ascertain whether the WD Fairway was a CTL as a matter of academic interest. The reason why the Defendants needed to make such enquiries was to enable legal advice to be given as to their liability or otherwise under the policy of insurance and to collect evidence for use in that potential litigation in relation to whether the vessel was a constructive total loss.

18. The Claimants were requesting that the Defendants agree that the vessel was a CTL based on an intermediate report, which was prepared when the surveyors had not been on board the vessel and at a time when a bottom damage survey had not been carried out. The Defendants were therefore unsatisfied with the reliability of the WNV report and required further investigations to be carried out.

The Claimants did not share the Defendants' view that further investigations were necessary. Given this stance and the potential for there to be a discrepancy between the WNV estimated repair costs and the Noble Denton estimates, there was the possibility of litigation. This possibility became even more pronounced from the first time that Noble Denton reported to Stephenson Harwood with substantive figures in early May 2007 and even more so once Noble Denton produced its first estimate. This was set out in an email from Mr Tony Kersey of the Second Defendant to Gordon Street of Marsh, acting as brokers on behalf of the Claimants on 15 May 2007 and later substantiated by the detailed figures provided by Mr Kersey on 18 May 2007. The estimate showed that Noble Denton disagreed with WNV's assessment and, critically, with their view that the vessel was at that stage proved to be a CTL.

19. It was clear that if the Claimants persisted with their claim and the Defendants resisted it, some form of litigation would be inevitable."

18. Finally, in paragraph 20 of his witness statement, Mr Davis referred to certain correspondence disclosed by the claimants, which, he said, showed that litigation was regarded by the claimants as a very real prospect from an early stage.
19. Bearing in mind that evidence, I turn to the judgment of Cooke J. Having set out the background, he said that what the underwriters were seeking to obtain by doing things the way they did was protection of privilege for the documents which came into existence. That was the reason for using Stephenson Harwood to instruct Noble Denton rather than doing it themselves. They hoped that by doing so it would achieve that measure of protection that is accorded litigation privilege. He then said that the focus of Mr Thomas Weitzman QC, for the claimants, was on the question whether or not there was at that stage, or indeed at any later stage, "litigation reasonably in prospect". The Judge referred to the observation of Brooke LJ in USA v Philip Morris Inc that the prospect of litigation does not have to be greater than 50 per cent for litigation privilege to attach, but he agreed with Mr Weitzman that it must be more than a mere possibility. In the light of those principles he said that the words "in prospect" mean "may happen", and it was clear not only that the defendants did think that litigation might happen but also that the requirement that "litigation is reasonably in prospect" was satisfied. His reasons were set out in paragraphs [12] to [14] of his judgment, as follows:

"12. The reasons are ultimately very simple. At 27^th March underwriters had the WNV report. On reading it, it became clear to them that the surveyors who had been instructed on their behalf, and would be referred to, and are referred to, as 'their surveyors', were saying that there was a constructive total loss. That was something which the insurers were not prepared to accept at that stage because they thought the report was manifestly inadequate. They certainly required more investigation and, for that purpose, they wanted to instruct Noble Denton and wanted to do so through solicitors. At that stage it must have been obvious to them that so doing was very likely to lead to trouble and likely to lead to aggravation, hostility and could well give rise to litigation in the future. Because their own surveyors had already said that it was a constructive total loss, to then require further material to be supplied, with a view to cross-checking that and with a view to perhaps defending any claim which might later emerge, it must have seemed to them that this could give rise to litigation on the part of the assured.

13. Mr Jacobs, I think, can fairly pray in aid what appears in para. 20 of Mr Davis' statement. What emerges there is material which was not known to the underwriters at the time but material which reveals what the claimants' stance was in June, July and August 2007, where it is plain that the claimants themselves envisaged the possibility of litigation and the steps that they would have to take to justify their position in court and to pursue successfully the claim that they had advanced.

14. Even if I was wrong about the position in March, I think the position in May again is 'more pronounced', as it is put, and that at no stage, notwithstanding the phraseology used in para. 18 of Mr Davis' statement, was anyone thinking about a mere possibility of litigation which was fanciful. At all times the underwriters could reasonably have in prospect the idea that litigation was going to take place, or that there was a real prospect of litigation or litigation could be seen to be reasonably in prospect, however one puts that test."

20. The claimants criticise the Judge's reasoning on a number of grounds, but they really come to the one overriding point that the Judge could not properly have reached the conclusion that the legal test, which he correctly set out in paragraphs [2] and [10] of his judgment, was satisfied on the evidence. The claimants submit that the critical matters for establishing litigation privilege concern the state of mind of the person procuring the documents in question, and that person in the present case was the lead underwriter, Mr Kersey. No evidence was, however, given by him. Further, Mr Davis does not state the sources of his belief in paragraph 17 of his witness statement as to the "…single wider purpose, or at least the dominant or dual purpose behind the generation of the Noble Denton documents following 28 March 2007…". The claimants submit that the Judge could not properly uphold the defendants' claim to privilege in the absence of any direct evidence from Mr Kersey and any explanation from Mr Davis as to the basis on which he could speak as to Mr Kersey's state of mind.
21. The Judge himself was rightly critical of those aspects of the evidence. He said in paragraph [15] of his judgment:

"Where litigation privilege is being claimed, it seems to me that the person who is responsible ultimately for the creation of the document, and whose motivation and state of mind is in issue, is the person who ought to be making the statement in question. At the very least, if it is to be someone else, that person should in the statement give the source of the information as to the purpose, to which the statement refers, so that it is plain who it is that is being referred to and who it is that is said to have had the dominant, dual or single wider purpose in question."

22. In the defendants' skeleton argument on this appeal, it is said that it is obvious that what is contained in Mr Davis's witness statement was on the instructions of the defendant underwriters and therefore reflected their motivation and state of mind. I do not accept that this is a satisfactory answer to the just criticism of the Judge. On the other hand, I see no reason why the Judge was bound to reject out of hand the defendants' claim to litigation privilege in the absence of a witness statement by Mr Kersey or a statement by Mr Davis that Mr Kersey was the source of Mr Davis's belief in paragraph 17 of his witness statement. In a case such as this, it will be more difficult, and may be impossible, for insurers to satisfy the requirements for litigation privilege in the absence of direct evidence of the relevant representative of insurers as to his or her state of mind. Equally, of course, if such evidence is adduced it is not automatically conclusive. Each case must be considered in the light of the evidence as a whole. This was the exercise carried out by the Judge.
23. In the present case it is reasonable to assume that the evidence of Mr Davis, an officer of the court, including his statement of belief in paragraph 17 of his witness statement, was based on what he had heard and read as a result of the retainer of his firm, and his own involvement, since 27 March 2007. That is of some evidential value. Whether or not it was correct has to be considered in the light of the other relevant and admissible evidence.
24. Mr Weitzman submitted that, although the Judge correctly set out the legal test in paragraph [10] of his judgment ("a real prospect of litigation, but … above…a mere possibility"), he did not apply that test to the facts and he may have misled himself by the way he restated the words "in prospect" as "may happen" in paragraph [11] of his judgment. Mr Weitzman submitted that this error is reflected in the words "and could well give rise to litigation in the future" in paragraph [12] of the judgment, which, he submitted, do not indicate anything beyond "a mere possibility" of litigation.
25. I find it impossible to accept that, having correctly stated the legal test in paragraph [10] of his judgment, the Judge overlooked that test in paragraphs [11] and [12]. The Judge was plainly seeking to employ the words "may happen" in paragraph [12] of his judgment in the sense he had previously explained, namely a real prospect of litigation, which is more than a mere possibility but not necessarily greater than 50 per cent. The expression -- "and could well give rise to litigation in the future" -- in paragraph [12] of his judgment is a perfectly apt description of something which would satisfy the test.
26. The real question in this case is whether the Judge correctly applied the legal test to the facts. The claimants' case is that the facts were not such as to satisfy the requirements for litigation privilege until the proposed Claim Form was sent to the defendants in May 2008. That seems to me wholly unrealistic. On any footing, the requirements were satisfied when Noble Denton produced their estimates in May 2007, which were substantially below the estimated cost of repairs in the WNV Report and supported a rejection of the claim to a CTL, with all its financial implications under the Policy.
27. The real issue of substance, which has been admirably addressed by both counsel before us, is whether the Judge was correct in paragraph [12] of his judgment to conclude that the requirements for litigation privilege were satisfied before May 2007 and, in particular, whether they were satisfied on 27 March 2007. The essence of the claimants' case is that at that date the defendants considered that further investigation should be undertaken before the claimants' claim for CTL could be accepted, but they had no reason to believe that Noble Denton would reach a different result from WNV, and so there was no more than a mere and contingent possibility of litigation. They are able to point to paragraph 18 of Mr Davis's witness statement, in which he said that "there was a possibility of litigation" on 27 March 2007.
28. Mr Weitzman further submits that the Judge could not properly take into account as a relevant factor, as he appears to have done in paragraph [12] of his judgment, that the appointment of Noble Denton might give rise to aggravation and hostility.
29. Mr Weitzman contrasts the position here with that in Re Highgate Traders, in which no litigation privilege was claimed for the initial reports, and in which the later communications were in the context of a likelihood of arson and fraud. In the present case, he submitted, the defendants instructed Noble Denton for the purpose merely of ascertaining the amount of repairs, that is to say the quantum of loss. He further submitted that the defendants cannot properly rely upon, nor should the judge have taken into account, the documents mentioned in paragraph 20 of Mr Davis's witness statement, which were documents internal to the claimants and which the defendants never saw prior to this litigation.
30. I agree with some of those criticisms. The fact that the appointment of Noble Denton might aggravate the claimants and be viewed by them with hostility, and the contents of the documents in paragraph 20 of Mr Davis's witness statement which were produced in June, July and August of 2007, cannot in my judgment illuminate the question of whether the test for litigation privilege was satisfied as at 27 March 2007.
31. On the other hand, I do consider that the Judge was both entitled and right to reach the conclusion which he did. This was a huge claim. The consequence of the cost of repairs exceeding €73.5 million triggered the right to the payment of €145 million under the Policy. It would inevitably give rise to complexities in relation to subrogation and many other legal issues of one kind or another. When the defendants received the WNV Report, they had concerns, which were serious ones, about the reliability of the figures for the reasons set out in Mr Davis's witness statement. It was as likely as not that Noble Denton would disagree with the WNV figures and that their own would be less than them. If they were less, there would be a real prospect of litigation. In my judgment, it was entirely understandable that in those circumstances the defendants would instruct solicitors, very much with a view to such possible litigation. The words of Oliver LJ in Re Highgrade Traders at p. 173 appear apposite here:

"What, then, was the purpose of the reports? The learned judge found a duality of purpose because, he said, the insurers wanted not only to obtain the advice of their solicitors, but also wanted to ascertain the cause of the fire. Now, for my part, I find these two quite inseparable. The insurers were not seeking the cause of the fire as a matter of academic interest in spontaneous combustion. Their purpose in instigating the enquiries can only be determined by asking why they needed to find out the cause of the fire. And the only reason that can be ascribed to them is that of ascertaining whether, as they suspected, it had been fraudulently started by the insured. It was entirely clear that, if the claim was persisted in and if it was resisted, litigation would inevitably follow. The claim had been made and there was no indication that it was not going to be pressed, particularly after Mr MR's acquittal. It is, as it seems to me, entirely unrealistic to attribute to the insurers an intention to make up their minds, independently of the advice which they received from their solicitors, that the claim should or should not be resisted. Whether they paid or not depended on the legal advice which they received, and the reports were prepared in order to enable that advice to be given. The advice given would necessarily determine their decision and would also necessarily determine whether the anticipated litigation would or would not take place."

32. To similar effect, in Hellenic Mutual War Risks Association (Bermuda) Ltd and General Contractors Importing and Services Enterprises v Harrison (The "Sagheera") [1997] 1 Lloyd's Rep 160, at page 168, Rix J said:

"In the present case the retainer is said to be for the purpose of investigating and advising on the casualty. In my judgment that meets the dominant purpose test, for the purpose of investigation is inseparable from the purpose of advice."

33. So far as concerns paragraph 18 of Mr Davis's witness statement on this aspect, it seems clear that Mr Davis was not using the expression "possibility of litigation" in a way which was by way of contrast to the expression or notion of "real prospect" in the authorities. This is apparent from his statement, also in paragraph 18, that:

"This possibility became even more pronounced from the first time that Noble Denton reported to Stephenson Harwood the substantive figures in early May 2007 and even more so once Noble Denton produced its first estimate"

34. In the light of the evidence as a whole, the Judge was not precluded from reaching his conclusion that litigation was reasonably in prospect on 27 March 2009 merely because of the phraseology used by Mr Davis in paragraph 18 of his witness statement.
35. The claimants submit that the Judge treated the retainer by the defendants of Stephenson Harwood on 27 March 2007 as being determinative of the question whether on that date they in fact contemplated litigation with the claimants. That is plainly not the case, as is apparent from paragraph [12] of the judgment, which considers all the relevant evidence.
36. The defendants say that the Judge's approach encourages the appointment of solicitors to act as post boxes in order to substantiate a claim to litigation privilege over documents which are not properly privileged. It would allow insurers to claim privilege in respect of any investigation in an insurance claim even in circumstances where the insurers have no reason to believe that the claim is not an entirely proper one. I do not agree. Each case turns on its own facts and will be judged in the light of the facts as a whole. Neither a statement on behalf of the insurer as to its state of mind, nor the mere fact of retaining solicitors, will separately or together necessarily be sufficient to satisfy the requirements for litigation privilege. The onus of establishing the existence of the privilege lies on the party that asserts it and is to be determined in the light of the evidence as a whole.

Waiver of privilege

37. On this part of the appeal the claimants rely, by way of analogy, on the decision of the Court of Appeal in Lillicrap v Nalder & Son (a firm) [1993] 1 WLR 94. I can deal with this very shortly.
38. The principle in Lillicrap was stated as follows by Russell LJ, at page 101:

"In my judgment, by bringing civil proceedings against his solicitor, a client impliedly waives privilege in respect of all matters which are relevant to the suit he pursues and, most particularly, where the disclosure of privileged matters is required to enable justice to be done."

39. In Paragon Finance Plc v Freshfields [1999] 1 WLR 1183, the Court of Appeal held that the implied waiver in such a case applies only to communications between the client and the solicitor and does not cover communications to which the solicitor was not privy. The principle was stated in the following way by Lord Bingham of Cornhill CJ at page 1188:

"When a client sues a solicitor who has formerly acted for him, complaining that the solicitor has acted negligently, he invites the court to adjudicate on questions directly arising from the confidential relationship which formerly subsisted between them. Since court proceedings are public, the client brings that formerly confidential relationship into the public domain. He thereby waives any right to claim the protection of legal professional privilege in relation to any communication between them so far as necessary for the just determination of his claim; or, putting the same proposition in different terms, he releases the solicitor to that extent from the obligation of confidence by which he was formerly bound. This is an implication of law, the rationale of which is plain. A party cannot deliberately subject a relationship to public scrutiny and at the same time seek to preserve its confidentiality. He cannot pick and choose, disclosing such incidents of the relationship as strengthen his claim for damages and concealing from forensic scrutiny such incidents as weaken it. He cannot attack his former solicitor and deny the solicitor the use of materials relevant to his defence. But, since the implied waiver applies to communications between client and solicitor, it will cover no communication to which the solicitor was not privy and so will disclose to the solicitor nothing of which he is not already aware."

40. The defendants' contention is that, by raising a defence that the claimants' obligation to indemnify only arose once they had a reasonable opportunity to investigate the loss, and such reasonable opportunity did not expire prior to April 2008, the defendants have necessarily put in issue, and as a result waived, any privilege that would otherwise exist in relation to the investigations carried out by Noble Denton on their behalf prior to April 2008.
41. This argument was not raised before the Judge. This is a matter of regret since it raises a point of some novelty and would have benefited from consideration by the Judge having the management of the proceedings.
42. Mr Weitzman was unable to identify any authority which extends the principle in Lillicrap either to litigation privilege in respect of communications with a third party or, as relevant to this case, to the assertion of the privilege by a defendant rather than a claimant.
43. In my judgment, the principle in Lillicrap has no application to this case on any footing. Even if it were capable of applying in principle to litigation privilege, on which I express no conclusion, on the facts of this case there has been no such waiver as could result in the implication of the Lillicrap  principle. The matters set out in the amalgamated Defence on which the defendants rely do not, either singly or together, on the face of the matters stated, involve any waiver of the confidential relationship with Noble Denton. The matters relied upon are all matters passing between the defendants or their agents and the claimants and their agents.
44. It may be the case that, when the matter comes to trial or at some other moment prior to trial, having regard to the witness statements and other such matters, the claimants may be able to point to some different result or inference; but, at this stage, looking merely at the pleaded amalgamated Defence, I can see no basis either in principle or on the particular facts of this case which would warrant the application of the Lillicrap principle to the litigation privilege which in my judgment applies in this case.
45. For all those reasons I would dismiss this appeal.

Lord Justice Wilson:

46. I agree.

Lord Justice Sullivan:

47. I also agree.

Order: Appeal dismissed